Several weeks ago, I wrote about how to issue LLC membership interests. In this post, I am addressing how a small corporation should issue corporate shares.
To start, one must examine the Certificate of Incorporation (Delaware) or Articles of Incorporation (California) to determine the maximum number of shares that may be issued. (To simplify this discussion, I will assume that only one class of common shares has been authorized.) A corporation may not issue more shares than are authorized.
Board Resolution to Issue Corporate Shares
Next, the board of directors must approve a resolution stating how many shares will be issued, to whom, and the amount to be paid for the shares (the “consideration”). The resolution may be approved during a board meeting or by unanimous written consent.
The validity of consideration other than money may depend on state law. For example, California does not permit shares to be issued in exchange for future services, but Delaware does.
Payment of Consideration
Next, the shareholder must provide, or agree to provide, the specified consideration to the corporation. If the consideration is money, it needs to be received by the corporation for deposit into the corporation’s bank account.
Once that happens, it finally is time to issue corporate shares. A corporate officer (typically the secretary) enters the new share holding into the stock transfer ledger.
If the corporation provides paper share certificates, then one must be prepared for the new shareholder. Typically, share certificates are signed by the President and the Secretary.
Notice to the State
Finally, depending on applicable state law, it may be necessary to provide notice of share issuance to the state. Please see, for example, Section 25102 (f) – Securities Law Compliance if You Incorporate in California.
In summary, it is not difficult to issue corporate shares – if you know what you are doing.
Related post: Stock Transfer Ledger Available for Download
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.